1. Determine Total Business Revenue

• Add up all income received from selling goods or providing services
  
• Include all forms of payment (cash, checks, online payments) related to the business
  
• Do not include any personal income or unrelated funds
  
• Record gross receipts over the full accounting period
  
• This is your gross business income
  

2. Identify Allowable Business Expenses

• List all expenses directly related to running your business (e.g., rent, supplies, wages, utilities)
  
• Include both fixed costs (e.g., insurance, salaries) and variable costs (e.g., inventory, travel)
  
• Expenses must be ordinary and necessary for your type of business
  
• Keep receipts and invoices to support your expense claims
  
• These are your deductible business costs
  

3. Subtract Expenses from Revenue

• Use the formula: Net Income = Total Revenue – Total Business Expenses
  
• This results in the net profit (if positive) or net loss (if negative)
  
• This amount reflects the real earnings from your business
  
• Net income is the figure reported on Schedule C of your tax return
  
• It serves as the basis for self-employment tax and personal income tax
  

4. Adjust for Non-Cash and Irregular Items

• Account for the depreciation of business assets as a non-cash expense
  
• Adjust for any returns, refunds, or allowances that reduce revenue
  
• Include business-use percentage for items like a home office or vehicle
  
• Only include expenses used for business purposes (not personal use)
  
• These adjustments help in arriving at an accurate net figure
  

5. Maintain Records and Use Tools

• Keep detailed and organized financial records and receipts
  
• Use accounting software or spreadsheets to track income and expenses
  
• Separate personal and business finances through dedicated accounts
  
• Reconcile your bank statements with your recorded revenue and costs
  
• This ensures transparency and accuracy during audits or tax filing